Phases of a Bear Market

Jul 27, 2008: 12:19 PM CST

Mish at “Mish’s Global Economic Trend Analysis” (an excellent site) recently detailed for us the “Ten Bear Market Phases” which is certainly worth a read and further study – or memorization.

I’ve been wanting to articulate something similar to these phases, but I tip my hat to Mish for compiling such a great and informative list, with brief explanations of each phase.

He lists the stages as follows:

1. A huge buy the dip mentality sets in during the initial decline.
2. Moderate concern sets in when buy the dip stops working.
3. Initial panic.
4. Numerous bottom calls are made, all wrong.
5. Search for the guilty.
6. Punishment of the innocent.
7. More panic.
8. Lawsuits fly.
9. Regulatory power is given to those most responsible for spiking the punch bowl.
10. Congress gets in the act and makes things worse

With visualization, and a cursory look-back over the last year (beginning around mid-2007), we can see these steps playing out in text-book fashion, from the overextended run-up leading to the top in October 2008 to the current governmental intervention, which President George Bush – without fanfare – will sign soon (in terms of the Housing rescue and Fannie Mae/Freddie Mac funding).

What has irritated me as we have progressed through these phases is the willingness of the public and TV Media to fall right in lock-step with such repetitive phases, almost as if they can’t help it.

Once the market topped (admittedly, we don’t know a true top until it has formed), many commentators (including Jim Cramer) were advocating the end of 2007 fall as a wonderful ‘buy the dip’ philosophy which continued into the early part of 2008.  Such “buy the dip” prognostications worked initially, but never once did a rally overtake its predecesor’s high (yes there was a rally off the January ‘bottom’ and the March ‘bottom’ but the market is lower now than both bottoms).

One felt the concern pick up as prices made new lows in June, but the concern did not (yet) turn into panic, perhaps until the Freddie Mac/Fannie Mae and collapse of IndyMac – although panic swept the street (or at least part of Main Street) at that time, that instance served as yet another temporary ‘bottom.’

Speaking of bottoms, what irritates me most when the market indexes have clearly and distinctly turned down (in terms of trend) is these same “buy the dip” forecasters are expounding their wisdom to get back in and buy because the bottom is here at last!  Such ‘wisdom’ is misleading at best to the public and malicious at worst.

One cannot call the true bottom until after it has occurred – anything else would be bucking the trend that has now clearly been established.  In a bear market, there is no support, though there are clear retracements which ar nothing more than counter-trend rallies that provide excellent opportunities to get short, not long.

Nevertheless, the true bottom will not be felt until panic overtakes, and these same market prognosticators abandon their “buy the dip” and “this is the bottom” mentality.  Often, bottoms form when everyone are convinced beyond a doubt that they will NOT form, and that the market will continue to fall indefinitely – or there will be a collapse of the economy as we know it or some other emotional panic situation.

Look for a bottom and for the market to stabilize once people stop trying to call a bottom and accept that the bear is here to stay – ironically, that will likely be when the bear ends.

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